Market corrections are inevitable and healthy

The signs of an overheating economy are seen in many Oil States. Traffic problems are one thing; a huge rush to invest in IPOs and major development projects another. Of course, a great many useful and worthwhile projects are now underway.

The real problem is that as an economic boom continues the investment decisions become less and less sound. In the early years of a boom it is different. You have to make a very solid case before anyone will trust you with their money.

But as the boom years roll on and on - and the Oil States have enjoyed five years of rising oil prices now - projects get started that make very little or no economic sense.

It was ever thus. In the 1970s, for example, each of the seven emirates of the UAE set about building a full-scale international airport; some of them still receive few planes even today.

What is needed to bring about a reassessment of investment decisions is a correction in local stock markets and in the real estate sector. Both sectors suffer from a lack of transparency in the Middle East, or put more simply nobody knows what is really going on due to a lack of proper statistics, financial disclosure and objective analysis.

This leads markets that are already over-optimistic about investment opportunities into making serious errors of exuberance because the full facts are not known.

In a market correction - which can be brought about by an unexpected event, like an oil price down turn, or just because prices have gone too high - then projects and companies have to face much closer scrutiny, and awkward questions that are now being avoided will have to be faced.

Market forces mean the survival of the fittest, not instant wealth for more and more people. It is part of the genius of capitalism that wealth creation has to be balanced by wealth destruction in order to restore equilibrium.

However, this is not a lesson that is likely to provide much consolation for any investor involved in a market correction.